Late Night Finance with Sacha

I am going to be trying something new in today’s virtual age of online meetings. It might work, it might be a bust, who knows. But I’ll try.

Late Night Finance with Sacha

Date: Friday, May 1, 2020
Time: 9:00pm, Pacific Time
Duration: Projected 1 hour, but if it leads to something interesting, longer.
Where: Zoom

Frequently Asked Questions:

Q: What are you doing?
A: This will be a Q&A session. Ask me about any company on the TSX/Nasdaq/NYSE and I will dissect it. Other questions about an economic/financial nature are accepted as well. I’ll share screens and go through financial statements and annotate (verbally or otherwise). This can be used as a sleeping aid for you.

Q: Why are you doing this?
A: Experimentation in video broadcasting. Who knows, I might learn something from you as well.

Q: Why so freaking late? I live in the eastern time zone.
A: It is late night finance, is it not?

Q: How do I register?
A: Send sacha@divestor.com an email. Subject line “Late Night Finance May 1”, and in the message body tell me what city and province/state you’re from (or if you’re international, city and country). I’ll reply later with the zoom channel and passcode to get in.

Q: Are you trying to spam me, try to sell me garbage, etc. if I register?
A: I can hardly manage a mailing list without breaking my own website, what makes you think I will spam you? No, if you register for this, I will not harvest your email or send you any solicitations. Also I am not using this to pump and dump any securities to you, although I will certainly offer opinions on what I see.

Q: If I register and don’t show up, will you be mad at me?
A: No.

Q: Will you (Sacha) be on video (i.e. this isn’t just an audio-only stream)?
A: Yes. You’ll get to see me.

Q: Will I need to be on video?
A: I’d prefer it, and you are more than welcome to be in your pajamas. No judgements!

Q: Can I be a silent participant?
A: Yes, although there isn’t much of a Q&A without at least one of you asking questions! I’ll start off with a small commentary and we can head on from there.

Q: Is there an archive of the video I can watch later if I can’t make it?
A: No.

Q: Is there a limit to the people that can participate?
A: Given the last-minute nature of this posting, I’d be surprised if there will be ANYBODY showing up, but until I get a better idea of how to manage these conferences, I’ll figure this one out if the situation occurs. This also includes me learning aspects of video meeting moderation.

Q: If nobody shows up, what then?
A: To be perfectly frank, I’m expecting this particular outcome. I’ll host another meeting with more notice.

Q: Will there be something in the future?
A: Yes, I’ll give a little more notice.

Better to be lucky than good

With sentiment on nearly everything getting better (“Economies to open up”), (“Remdesivir positive results”), (“Deaths less than models projected”), etc., stocks have received a flood of bidding from people sitting on the sidelines.

Things never work in straight lines. Markets never move continuously up. There will be spouts of fake news now and then to throw some sand in the gears. You’ll hear about (“Second wave”), (“Shutdown to last until December”), (“Food shortages”), etc.

This is all media noise. The paradoxical thing is that even though the media is spewing mostly noise these days, one has to pay attention to it since it gives you a very general barometer as to sentiment – if you assume something to be false, but others believe it is true, the fact that you know others think it is true is in itself a valuable piece of information.

Placing orders is always an inexact science. On the buy side, sometimes it makes sense to pound asks, but in most of the cases it is more efficient to just passively place orders on the bid and let the market come to your own price.

However, I have a phrase which is “better to be lucky than good”, which is to say that sometimes you get a clairvoyant fill on your orders, and sometimes it comes up annoyingly short.

A couple days ago I had a limit order in for a stock, and I missed it out by two cents. This wasn’t a penny stock either. That stock is now up about 13% from where I initially placed the order, so I am kind of steamed about it. Unlucky. It was definitely a case of ‘too much too fast’, and they will regress down, but I very much doubt to the price where I nearly hit my limit order.

You probably are asking, “Why not just hit the ask when it is two pennies to your order?”. I usually don’t set my orders in the middle of the trading day, and if the price I set for this particular security was 5 cents higher, I probably would have gotten filled. That’s just the roll of the dice occurring. That’s trading life – psychologically it is irritating (hence this post) but you have to forget it and move on and deal with the reality the market gives you, not how you wish it to be.

Next chart, the May 2020 VIX futures, where you can see my liquidation on blue triangles:

I liquidated my VIX short orders in the market euphoria, and I say I did pretty well on this one. The last order to cover the short was at 31.50 and the low was 31.45. Needless to say – lucky on the exit. I’m looking to get back into this trade at higher prices.

Investing involves a lot of skill, but in short-term situations as these, sometimes you need a good dose of luck.

Birchcliff Energy preferred shares

The market is starting to normalize again. We’re about half-way done on the up-side, and I estimate while there will be some minor panics here and there that will bring things down 3-5%, in balance you’re going to see things get back to at least where they were before the end of the year.

I’ve taken my fair share of these shares (earlier in the month), so I’ll post it to the public since there is plenty of upside. I’ve written about them before, so this is going to be somewhat redundant.

Birchcliff Energy (TSX: BIR) is a natural gas heavy producer. They are a low cost producer, refine their own gas, and they will survive. They are primarily financed by a low cost line of credit which is not in any danger of having the plug pulled. While their equity remains undervalued (and insiders also believe the same, especially those that were buying when the stock was under a dollar), the even better risk/reward are the preferred shares.

There are two series. BIR.PR.A is a standard fixed-reset perpetual preferred share, currently 8.374% coupon with a +6.83% reset rate, resetting September 2022. Even at the present Government of Canada’s 5 year bond yield of 0.41%, at current market rates it will reset at a 10.5% yield. It is conceivable that they will trade up to par again, just as they were for most of 2017 to 2019. A ‘quick’ capital gain of roughly 50%, plus you’re given a very healthy 12% eligible dividend. Even with the Bank of Canada turning our currency into toilet paper, your real return will be positive.

BIR.PR.C is a straight perpetual share with a coupon of 7%. After June 30, holders can put their preferred shares back to Birchcliff at par, which BIR has the option of paying cash, or giving stock at the 20 day VWAP or $2 minimum per share. Considering BIR is trading at $1.57/share, this works out to a discount to the current preferred share value ($17 for the preferred shares vs. $19.60 in BIR stock). I don’t know what the term is in finance, but it creates a “Mexican standoff” situation where if this continues past June 30th, I don’t think holders will be too eager to redeem, nor will Birchcliff be too eager to redeem either. In the meantime, you can collect a 10.3% yield (assuming a $17 purchase price) for waiting. The obvious price target is par, although if you get fancy you might be able to get a mild premium.

I generally believe the worst is over for oil and gas, and as a result, all of this is going to be a moot point when BIR goes higher later this year. Why not buy the equity? There are worse things you can do, but the preferred shares are pretty much a lock for appreciation on a risk/reward spectrum. For every 1% the equity goes up, the preferreds will probably get around 75% of it until they get closer to par.

Of course there aren’t any guarantees of 50% gains in a few months’ time, but this one seems feasible. The risk scenario is that the common stock meanders about and you collect an ultra-high coupon while waiting for natural gas demand to rise. In the case of BIR.PR.C you end up with 12.5 shares of BIR.

Impact of BNN (Mediagrif)

Mediagrif (TSX: MDF) is a small Quebec-based software company. It had a lot of turnover on its executive suite, and when it comes to software organizations, if they lose a lot of core intellectual knowledge, it can be very difficult for new offerings to come out. These sorts of changes are impossible to detect looking at financial statements (other than the losses that occur as a result of a loss of product agility), but you could infer this was going on in MDF. Perhaps the most well-known Canadian offering of MDF is Merx, where you can sell the Canadian government defective face masks and any other procurements they are interested in.

Today, MDF stock spiked up 40%:

I tried looking up what could possibly have caused the spike up. No news releases. Nothing on Twitter. Nothing on the usual message forums. But then I found it – some analyst on BNN made it his top pick and equated it to Shopify:

MEDIAGRIF INTERACTIVE TECHNOLOGIES (MDF TSX)
New position.

Mediagrif providea Shopify-like e-commerce solutions, but for much larger companies. They manage the online platform for Sobeys/IGA and also for Carrefour in Italy, the only company enabling online food orders during the peak the crisis. It also owns platforms that enable suppliers to bid on government contracts, allowing corporations to exchange data with their suppliers and customers. This is one of the rare companies doing well in this environment and benefitting from businesses going digital. Whereas Shopify trades at 35 times revenue, Mediagrif trades at just under one time. We have been accumulating shares and now own 5 per cent of the company.

Talk about bidding up his own book! MDF traded 186,000 shares today and typical volume is 10,000 shares. It took about 10,000 shares of trading after 9:00am (pacific) to get the stock up from about $3.80 to $4.80 (presumably after it was mentioned on television).

Who are these people that sit on television and pound the buy button on the words of BNN analysts? How long will be it before they get bored and start hitting the bid and reaching for the exits? (Answer: After 10:12am, 1,200 shares were traded at $6.25, and after that it was just the day-traders that got involved).

I don’t watch BNN, but if you ever have one of your smallcap stocks get mentioned on it in a positive light such as above, I’d pick a good point to dump it (especially as there is liquidity from the active daytraders) and you’ll very likely be able to reload later.

I don’t have much opinion on MDF. There aren’t a lot of software companies on the TSX (other than Shopify, the largest one is Constellation) so as a group they are not difficult to keep an eye on all of them. In general, the sector is more resilient to COVID-19 than others (especially Cineplex!).

Mogo Inc. Debentures Extension Proposal

(Hat tip to a comment that Will wrote)

It is really rare when I see a debt extension proposal that is so one-sided that it makes me speculate about the ulterior motives.

You can at least excuse entities like Lanesborough REIT (TSXV: LRT.UN) which was all but insolvent when they asked their debentureholders to take a haircut – it was a case of “if you don’t, we’re going to pull the plug and leave you with nothing”. At least the company had a hammer to pound on the hands of the creditors.

The proposal to extend the unsecured convertible debentures of Mogo (TSX: MOGO.DB) is even more absurd. Management Information Circular here.

Mogo is one of those millennial fintech-type companies that offers a mish-mash of financial products (credit card, mortgage, small loan, crypto, etc.). The loan portfolio is extremely risky, as judged by their charge-off rate in 2019 – 17%, which puts them at payday loan levels. The entire operation is still losing money, but this is accelerated by a considerable cost of capital – they are paying double-digit rates of interest on their credit facility.

They merged with Difference Capital (formerly TSX: DCF) which enabled them to raise enough cash to survive another year or so. But they’re still running out of cash – down to about $10 million at the end of 2019. They inherited a (less than liquid) private equity portfolio from Difference Capital worth $20.8 million on the books, but who knows how much it is actually worth (given COVID-19, I’d wager it would be worth less than the stated book value).

One headache to MOGO is their convertible debentures. There is $12.7 million outstanding and it is due to mature on June 6, 2020. As MOGO clearly doesn’t want to pay for it with cash, they can convert it into shares of MOGO at the 20-day VWAP ended May 26, 2020. MOGO currently has a market cap of $34.5 million, and triggering this option would likely cause the market capitalization to drop further and heavily dilute existing equity holders. While it is difficult to predict the magnitude (this depends on how heavily the convertible debenture holders can short sell MOGO stock to drive the price down to receive more shares upon conversion), I would guess there would be at least 50% dilution.

So to preemptively arrest the short-sellers, they float a proposal to extend the debentures on a vote to be held on May 22, 2020. I believe this is the ultimate motive of management’s proposal.

The terms and conditions is that if 2/3rds agree, the major changes are that MOGO debentures will be extended 2 years, the conversion (at the demand of the holder) will lower from $5 to $3.50, the floor conversion price on maturity (on the option of the company) will be at $1.50/share, altering the change of control provisions, in exchange for a 1% consent fee for those that vote in favour. In particular, the $1.50/share floor conversion price is highly unfavourable to existing debentureholders.

If the vote fails, MOGO.DB holders will be converted into a lot of MOGO shares. By having this vote, management is hoping that the VWAP for conversion will be higher than what it would be if they didn’t float this proposal – and if MOGO.DB holders actually agree to this, it would be a huge coup for them since the debentures are most likely to be converted into stock at $1.50/share in a couple years – representing much less dilution than in the current scenario.

I do not have any position in any of this, I do not intend to take a position. I am curious, however, to see how it will turn out.